Bank Concentration and the Supply of Credit in Argentina

After the December 1994 devaluation of the Mexican peso, Argentina experienced a concentration of financial institutions. This paper examines the effects of that concentration on the supply of credit. While the concentration process may have improved the efficiency of domestic financial intermediation, it also may have contributed to the temporary contraction in bank lending observed during 1995. The concentration in financial intermediation activity would not have had any effect on total lending to the private sector had expanding institutions substituted for shrinking institutions on the credit side and the deposit side. However, an argument can be made, based on the literature on asymmetric information, that large financial institutions are not able in the short run to replace the credit provided by small institutions, particularly in circumstances such as those prevailing in Argentina in 1995. Exchanging information on their customers. past and current situations is difficult in the short run and therefore financial institutions can not properly evaluate a customer's creditworthiness. This exchange is particularly restricted between small and big institutions as the type of relationship-driven activities standard in a small bank are difficult to replicate in the loan approval channels of a larger organization. Evidence of this contractionary effect on loan supply is given. First, the likely relevance of imperfect information in the Argentine credit market is analyzed by looking at the disparities in portfolio holdings of different institutions, the significance of such disparities is corroborated by a Simple Factorial Analysis of Variance. Second, an estimation of the effect on credit of information destruction is given. Although other factors (such as a change in the demand for loans, increased prudential requirements, a more cautious lending behavior on the part of banks, or the worseing in the quality of collaterals resulting from the recession) may have contributed to the observed outcome, the evidence presented lends support to the hypothesis that financial concentration and loss of information also played a role in explaining the decline in credit that took place in 1995. The paper concludes by discussing what could be expected for the Argentine credit market from a longer-term perspective.